Refinance rates can be a smart way to get out from under a mortgage. It can also lead to substantial savings. In 2014, for instance, borrowers who refinanced saved themselves a combined $5 billion in interest payments, according to lending giant Freddie Mac.
However, it takes more than a mortgage estimate to determine if refinancing is the right choice. It’s best discovered by posing a series of questions. Your answers will decide if it’s a good move.
Here are five questions that everyone who’s considering refinancing should ask themselves:
1. What’s my main goal?
You can’t know if refinancing is appropriate without a stated objective. Generally, refinancing is suitable for lowering your rate of interest or changing to a different mortgage term, usually shorter. For instance, if you have disposable income but haven’t saved much for retirement, refinancing to a shorter term can be worthwhile.
2. Is my credit score good enough?
“A FICO score that’s less than 650 may disqualify you from refinancing.”
Your credit score serves as a numerical representation of your reputation. The higher it is, the better you are at paying off your credit payments. Generally speaking, those with FICO credit scores in the high 700s will qualify for the lowest rates. Approval depends on the lender, but borrowers wanting a prime rate should aim for a score of 750 or higher.
3. How long do I plan on owning my current home?
It may not make much financial sense to refinance if you don’t intend to stay in your home for very long. Using a mortgage calculator – along with an estimate of what percent of the loan refinancing will cost – you can determine at what period your break even point is. Those who intend to live in their present home for more than five years are typically good candidates for refinancing. Staying for two years or less may not be.
4. Will I get a lower interest rate?
It’s an exercise in futility to refinance if you only end up in a worse position. That’s why it’s important to understand the terms of your current loan and how they are about to change by refinancing. Because every person’s situation is different, seek out multiple lenders for quotes that are tailored to your financial circumstances.
5. Have I built up enough equity?
“Your property should be equity rich to refinance.”
Equity is a fancy term for the value of a mortgaged property after liabilities have been assessed. For the most part, lenders require that borrowers have a minimum of 20 percent equity in their house. There are circumstances where having less may still be worthwhile for both parties. To determine how much equity you have in your house, loan-to-value calculators available online can help.